Public sector procurement outsourcing – why is nothing happening?

As part of our series around procurement shared services / outsourcing, we’re asking today why there hasn’t been more activity in the public sector? Sure, there has been a lot of talk about mutuals and social enterprises by the coalition government, but I can’t think of a major new outsource since the election in central Government. And in the shared services arena, the strategy we featured last week was noticeably vague in general and about any role for the private sector.

In the procurement space, some were convinced that Buying Solutions would be “outsourced” in some way. That hasn’t happened. There is the drive for a more joined up approach in central Government, but without private sector involvement. In the Health sector we’ve seen the tie up between the North West commercial agency and NHS Shared Business Services / Steria. But there is nothing very dramatic to show so far in terms of procurement outsourcing anywhere in the public sector.

Perhaps this hesitancy in senior political circles – around procurement and back office functions generally - is driven by recent bad press in local government particularly?

Southwest One (SW1) is a joint venture, signed in 2007, between IBM, Somerset County Council, Taunton Borough Council and Somerset Police. Back office services, including finance and procurement, were transferred into the JV. It appears that the savings predicted were largely through procurement, based on implementing SAP, category management and better compliance.

But the operation has struggled to date, with reported revenue for 2009 at £35million, and pre-tax losses of £16.5million.

And as the recent Somerset council (SCC) review of the contract says,

Currently identified projected savings to SCC from procurement (the most substantial individual element) are approximately £45m, with approximately £2m having been delivered to date. This is substantially below projections.

But it’s not just the savings that are coming up short. Here’s an extract from the council’s annual report.

Since its introduction in April 2009, our financial system (SAP) has proved difficult to use effectively. Despite a number of SAP experts helping us …, finance staff in particular continue to struggle with the poor initial set up. Whilst some improvements have been made to the system, work continues to resolve the remaining issues…. improvements are still required so we can reduce our dependency upon spreadsheets……. The speed of the system and management information must still be improved so that budget holders can access their own reports.

There have also been questions around Colin Port’s role (and that of his wife, who was involved as project manager for SCC in setting up the contract with Southwest One and IBM). Yes, another senior policeman in the public eye! Port is Chief Constable of Avon and Somerset Police, so a ‘senior customer’ of SW1. But he also sits on the SW1 Board. Now clearly, the public sector side should have senior representation as SW1 is a JV. And yet, best practice would have a clear separation between purchaser and provider.

Given the Chief Constable’s position at the top of the pyramid, he shouldn’t really take the lead on either of those roles, we would suggest. I would have expected perhaps the Force COO or equivalent to sit on the JV Board and then the CFO or Head of Procurement could be the ‘senior customer’. (The local MP has a very amusing blog and features this issue regularly).

But notwithstanding personal issues, the success of the venture in delivering benefits to the users is key. We hope to speak to SW1 soon and get a balanced view of progress; they have recruited a new Procurement Director recently who comes with a good reputation, so we’ll see whether that makes a difference.

Meanwhile, there has been chaos in Suffolk, who announced dramatic plans to outsource pretty much everything, then in the resulting furore have lost their CEO and Council Leader... they’ve now pulled back from the plans. Barnet have ambitions to be the “Easy-Council”, acting as a commissioner rather than provider of services, but, as we’ve seen here, have had problems with far more mundane contracts. And we hear rumours of some other big outsourcing deals struggling in the local government world.

So, all in all, not many good adverts for local authorities’ ability to handle what we might call transformational outsourcing. Putting these deals in place with huge, smart and savvy organisations like Capita, IBM or BT isn’t a trivial matter – do local authorities have that capability? And it’s easy for users – and even for IBM – to underestimate the difficulty in a public sector environment to manage significant change programmes such as an ERP implementation. There must be some lessons to learn there.

We’re not saying central Government is better by the way - the Department for Transport’s shared service operation has been another disaster, perhaps for discussion another day. So all in all, you can see perhaps why outsourcing and shared service initiatives – generic or procurement specific -  haven’t taken off yet. Francis Maude may be looking around and thinking this area is fraught with risk of failure. That would would explain his public services White Paper and a Shared Service strategy document that are both directional and somewhat cautious, rather than action-orientated!

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Voices (9)

  1. David Orr:

    First accurate expalantion of so-called “teething problems”:

    Southwest One implemented SAP in March 2009, with some help from IBM. Although the duplicate payments were made in 2009-2010, a Somerset audit committee report from December 2010 indicates that they were not identified until 2010-2011.

    “There were the usual teething problems of implementation relating to ensuring everyone who needed to use the system was adequately trained, but the main problem was the implementation of a bolt-on invoice scanning system that did not work well to start with,” a spokesperson for Somerset County Council said.

    The scanning problem meant that Southwest One staff were unable to tell staff at the county council where invoices were in the system, and whether they had been paid, or were soon to be paid.

    Staff therefore bypassed the scanning system by making payments by cheque, to avoid urgent payments – for example, to foster carers – being delayed.

    “Because of the poor implementation of the scanner solution, some invoices were input twice by either Somerset or Southwest One staff.

    “But because SAP’s invoice-matching tools are very poor – i.e. unless there was an exact match – it was extremely difficult to identify duplicates before payments went out the door,” the spokesperson said.

  2. bitter and twisted:

    SAP = failiure

  3. David Orr:

    Is part of the problem the over-egging of spend and savings possible in order to make the Business Case stack up make the contract look viable?

    As a former employee of Somerset County Council (SCC) and an IT/Business Analysis secondee into SW1 for over 3 years, then I do have hands on experience.

    Firstly, the overall spend that was considered “influenceable” was, in my view, massively over estimated and then the average savings are predicated on 30% savings of that exaggerated influenceable spend.

    SCC either competitively tendered or used OGC framework contracts (have to under the standing orders), so we were simply not that terrible at procurement i.e. 5-10% at best should have been used in a prudent Business Case.

    I am a fan of LEAN and John Seddon’s systems thinking and enginerring processes in support of the service outcomes. I always thought that the focus for savings should have been on optimising or re-engineering SCC processes (BPO/BPR).

    BPO/BOR was something I hoped that IBM would “bring to the party”. There has been some what I call “mechanised LEAN”, where IBM have brought some assemby line BPO/BPR to Help Desk calls, PC fixes etc. Otherwise innovation in main service delivery for SCC has been a great professional disappointment to me i.e. SAP/ERP will not care for the elderly & disabled, protect vulnerable children, repair roads, lend books – where the real world customer stuff lies.

    The big & costly processes that could be optimised/re-engineered lay back in SCC in big Service Directorates around Social Care, working with NHS in a joined up way etc.

    Additionally, I really do NOT subscribe to the simplistic split in complex service delivery systems between so called “front” and “back” office.

    Look at the Police – Catching looters involves back office review of CCTV footage, identification of offenders, preparing arrest warrants, nabbing offenders (frontline) then processing prosecution etc. Split that then!

    ICT is pervasive in organisations now and underpins most processes and is key to strategic business plans. Now that SCC want to save money on accommodation through a property review and more home working, they find that they need IT for digitising documents and storing them and IT infrastructure to support that. But they have lost control of their strategic IT through SW1 and not having any in-house IT left.

    To make (spend) matters worse, then SCC constructed a client to manage IBM in a complex contract driven by ICT with SAP & ERP and astonishingly did not have ANY ICT expertise within the client.

    That same under-resourced & under-skilled (in ICT) client is now re-negotiating the SCC contract with IBM for SW1 whilst remaining by definition of failures, lack of savings etc as being itslef “unfit for purpose”.

    The real worry is that this failed model of efficient joint service delivery is being promoted for the National Police IT Company from next April controlling £1.2bn of Police IT spend for all of Engalnd & Wales. And with Police Chief Constables and their Private Suppliers all sitting on the same Board.

    Not to mention IBM advising the Cabinet Office on IT under an MoU. Will that involve all the Government G-Cloud infrastructure and systems?

    Are we looking at another £7bn+ loss of scarce public funding along the lines of the disastrous NHS for IT fiasco?

    When will we learn?

  4. Derek Lancaster:

    Yes, Howard puts it very well indeed. Having been involved with outsourcers and consultants for a number of years as a public sector customer it seems to me there are two main challenges.
    The first is, as Howard says, reducing variety. Without a complete re-design of processes it is very difficult to get these setups to work well, and this is not at all easy to achieve in practice across a complex organisation. Increasingly in our private lives we are used to choosing the buying channel and process that works best and seems best value to us on any given occasion, and price comparison websites and search engines support our decision-making. It’s only very recently that this sort of technology has begun to appear in the corporate world on any scale, and even then only for commodities. By contrast the experience of using outsourced services in our private lives is often poor – all those hard to use call centres and scripted conversations with the person at the other end! One wonders why we tend to perpetuate the same problems in our work environments.

    Secondly, if an outsource strategy is to be pursued it requires very strong sponsorship from senior leaders. All too often, those who are professional leaders of front-line services are not able to give this the attention it needs and then find the new arrangements are not fit-for-purpose for their division and there’s a lot of noise until the problems are patched up.

    There must be a better way…

  5. David Atkinson:

    Brilliant comment from Howard. I couldn’t have put it better myself.

    I’ve been following Sedddon and other ‘systems-thinking’ commentators for some time now and their arguments and approach is so compelling. The ‘efficiency through industrialisation’ claim by shared service providers has been comprehensively deconstructed by Seddon in particular.

    I’ve also seen how it fails (and been rectified) in Procurement set-ups within organisations.

    I’m a convert, and I think all of us have something to learn from taking a (non-tech) ‘systems’ approach to the work we’re involved in.

  6. Howard Clark:

    All of the arguments made for sharing come from within the shared services industry (IT companies, consultants, or think tanks funded by companies selling shared services). All of the so-called evidence is based upon estimates, projections and surveys. No real data.

    Professor John Seddon, an expert in service organizations with extensive experience in public sector systems says that there are two arguments for sharing services. The ‘less of a common resource’ argument and the ‘efficiency through industrialisation’ argument.

    The former argument is ‘obvious’: if you have fewer managers, IT systems, buildings etc; if you use less of some resource, it will reduce costs. But the reductions are often minor and one-off.

    The second argument is ‘efficiency through industrialisation’. This argument assumes that efficiencies follow from specialisation and standardisation – resulting in the creation of ‘front’ and ‘back’ offices. The typical method is to simplify, standardise and then centralise, using an IT ‘solution’ as the means.

    The problem with the industrial design is simple – it doesn’t absorb variety in demand. Because of this, costs soar as the IT system has to be modified and customers ring back again and again because they can’t get what they want.

    The evidence of this flawed theory can be found everywhere. In HMRC or South West One shared services which predicted savings of £176 million over 7 years and actually recorded a pre-tax loss over its three financial years. Duplicate payments sitting at £772,000 and a struggle to manage £12.9m in outstanding debts.

    This week Western Australia followed Queensland in ending its shared services. It was claimed that it would save $58 million a year and instead cost $444 million dollars (no savings). It is estimated that it will cost taxpayers between $1 – $2 billion dollars to rectify.

  7. David Bingham:

    A very good article.
    Why is there such a lack of ambition within most central Govt departments, with so much taxpayers’ money spent on the procurement of goods and services and yet such a low percentage of targeted savings in total coming from the Cabinet Office (c.1-2%)? Equally worrying, is the lack of real engagement with private sector organisations who have a demonstrable track record in efficiency and effectiveness improvements in this area as well as lots of new thinking and ideas to share.
    Surely, dramatically more open thinking, greater ambition and significantly higher savings would mean fewer overall job losses and a more positive contribution to the stimulation of that much needed growth?

  8. Peter Smith:

    Sorted! Thanks…

  9. Richard:

    /ian/MOGGTHEBLOG hyperlink not working

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